JEFFERSON CITY, Mo. — A loophole in an agreement reached between states and certain cigarette manufacturers could cost the state almost $70 million in revenue this year and more than $1 billion across a decade if the Missouri legislature doesn’t act before April 15. The deadline comes after years of delays despite pleas from both Gov. Jay Nixon and Attorney General Chris Koster.
It begins with the 1998 Master Settlement Agreement (MSA), the landmark $200 billion deal between Big Tobacco and 46 states. At the heart of the deal was an arrangement between tobacco and the states to prevent further lawsuits. The major companies signing onto the deal would compensate states based on their sales for the following decades, in turn shielding themselves from more legal action.
Enter the non-participating manufacturer, a designation used for any cigarette company that did not negotiate with the states during the 1998 MSA agreement. They were not bound by law to make payments to states or comply with any other MSA provisions.
The discrepancy between what non-participating manufacturers (NPMs) and participating manufacturers has created a distinct competitive advantage for the NPM’s. With big tobacco subject to payments to the tune of billions of dollars, NPM’s have seen an explosion of market success in the decade and a half since the MSA.
“When the MSA was signed, non-participating manufacturers were about 2 percent of the Missouri cigarette market,” Anne Moy said. Moy is lobbying the legislature to fix the NPM loophole on behalf of a new organization, Fair Trade for Missouri. “Right now, NPM’s make up about 20 percent of the market. That’s a huge difference.”
Foreseeing the NPM problem, 45 of the 46 MSA states have passed a fix. States passed laws requiring NPM’s to pay into an escrow account, where the funds would remain for 25 years. The accounts would be used on any legal judgments against NPM’s in lawsuits leveled against the state, and is supposed to keep NPM’s from having a competitive advantage.
Currently, NPM’s in Missouri do pay into an escrow, but because of a legal loophole, they are allowed to withdraw all funds paid in escrow almost immediately after depositing them. Lawmakers supporting the fix say Missouri’s loophole has allowed smaller cigarette companies to target the state for sales. An amendment to close this loophole and keep the money in escrow for 25 years is currently before both the House and Senate.
That amendment must be passed before April 15 when big tobacco deposit their annual payments into state coffers. An arbitration panel, which reviewed Missouri’s MSA role, found that because of the state’s failure to close the NPM escrow loophole, big tobacco was at a competitive disadvantage to the tune of nearly $70 million in 2003. The panel is expected to reach similar conclusions in all the following years as well. All payments from MSA signatories goes directly into general revenue.
The MSA allows companies to reclaim or withhold payments to make up for just such a loophole. If Missouri fails to correct the problem, this year’s payments will be slashed. Yesterday, the Senate appropriations committee allocated a $70 million loss in funds reflected by big tobacco’s impending lower payment.
Moy says that if the legislature can pass the escrow fix, big tobacco will not withhold its payments this year. Closing the loophole would bring big and little tobacco to the table, proponents say, to reach a more equitable settlement with the state and Koster.
House Budget Chairman Rick Stream, R-Kirkwood, and his Democratic co-sponsor, Rep. Chris Kelly, D-Columbia, are carrying the language in the House. In the Senate, appropriations chairman, Sen. Kurt Schaefer, R-Columbia, is sponsoring the fix. Both bills were heard on Tuesday in an effort to educate lawmakers on the issue.
“It’s a fundamental practice of business that all companies should be operating under the same rules,” Kelly said. “I think the votes are there. I think my colleagues understand the situation well enough to vote for this.”
Lengthy hearings in the House and Senate did not result in a vote, as sponsors in both chambers told The Missouri Times that lawmakers needed some time to familiarize themselves with the issue before moving forward.
Collin Reischman was the Managing Editor for The Missouri Times, and a graduate of Webster University with a Bachelor of Arts in Journalism.
